Pensions

How pillar 3a can cut your tax bill – 9 tips

TIPS
| By Leo Hug |
Source: iStock.com / BartekSzewczyk

The potential offered by pillar 3a is still underestimated. Even making small, regular payments into this restricted pension plan can yield tax benefits. Follow these 9 Comparis tips.

Our tips will help you make the most of your pillar 3a:

1. Maximum contributions – maximum tax benefits

The maximum annual contribution into pillar 3a is limited to 6,826 francs for employees (in 2019). Self-employed people with no occupational pension can pay a maximum of 34,128 francs or 20% of their net income into pillar 3a. Important: any payments over this amount will not be accepted by the tax office.

The tax benefits of pillar 3a are as follows:

  • Contributions can be deducted from your taxable income.
  • The retirement savings are exempt from wealth tax.
  • You do not have to pay income or withholding tax on interest and capital gains.
  • Your withdrawn pension assets are taxed separately from your main income and at a lower rate than income tax.

2. Splitting your pillar 3a – multiple accounts pay off even with small balances

Although each canton uses different methods and tariffs for calculating the lump sum tax, it is still worth spreading your pillar 3a savings across multiple accounts and withdrawing them at different times, whichever canton you live in. On average in Switzerland, you can save 21% on tax by withdrawing 70,000 francs, for example, from three separate accounts. Staggered withdrawals are therefore an easy way for pillar 3a savers to reduce their lump sum tax.

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3. Compare interest rates

Rates on savings accounts currently lie between 0 and 0.1% – preferential rates on pillar 3a accounts are slightly higher. However, there are significant interest rate differences – of up to 1% – between the third pillar products offered by individual banks. It’s therefore worth comparing rates. In the long term, even a fraction of a percent can have a considerable effect on the savings you accumulate.

4. Pillar 3a – why it pays to pay in early

If you start paying into your pillar 3a in January, you will benefit from the preferential rates for the whole year.

5. Savings or investment account?

You can invest your pillar 3a assets in a savings or investment account. With the latter, your money is invested in securities (shares, bonds). Savings accounts are the more conservative option, carrying minimal risk. Interest is credited to the account annually, but the interest rate may fluctuate at any time.

A securities solution via an investment fund is suitable for people looking to invest over a long term (15 years or more). There is a risk that you may lose money, depending on the state of the economy and composition of the fund. In favourable circumstances, on the other hand, the yields can be greater.

6. Compare fees and costs of investment accounts

In the long term, additional costs and fees can have a significant impact on the capital accrued. Over time, they are the biggest eroders of investment returns. The fees charged on the various pillar 3a investment funds can differ quite widely. It's also important to find out whether you will be charged any additional fees. As a rule, no transaction or custody fees are charged on 3a savings and investment accounts.

Savvy savers who do their research and check their account costs regularly will be at a distinct advantage. It's also a good idea to get some advice from an independent specialist when comparing the different investment options.

7. How well protected are pillar 3a products in the event of bankruptcy?

The safety of pension accounts if a bank collapses is a frequent source of misunderstanding. Although pillar 3a and vested benefits accounts are classed as preferential, they do not enjoy the protection of the depositor protection scheme afforded to traditional savings accounts, i.e. 100,000 francs per customer.

Nevertheless, pension savings accounts fall into the second and not the third class of creditors, so will be given priority over the latter in the event of a bank failure. Although this preferential treatment increases the chances of a payout, it does not guarantee it.

The only pension accounts that are fully protected are those provided by cantonal banks with a state guarantee. In this case, the canton guarantees full reimbursement if the bank files for bankruptcy.

Important: Of the 24 cantonal banks, three have no state guarantee or only a limited one.
Banque Cantonale Vaudoise (BCV) and Berner Kantonalbank (BEKB) have no state guarantee; Banque Cantonale Genève (BCGE) has a limited state guarantee. 

8. Endowment-style policies are not always the best solution

Endowment-style policies combine insurance cover with a savings element. However, they ultimately tie young savers to one product for three to four decades. If you want to accumulate capital using an insurance product, you should be aware that ending the policy early will lead to significant losses and in the early years you may not get anything back at all. For more flexibility, you should separate risk cover from your savings plan: take out a term insurance policy with an insurance company and choose a savings or investment plan with a bank. However, if you lack discipline when it comes to saving, it may be helpful to be “forced” to make the regular payments required for an insurance solution. It is a very individual decision and should be considered carefully.

9. Supplement pillar 3a with pillar 3b

Pillar 3a savings options are also known as restricted pension plans. This is because you can only withdraw the assets under certain conditions. The purpose of the capital accumulated in pillar 3a is essentially to fund retirement. This means that it can only be withdrawn five years before statutory retirement age at the earliest – with some exceptions.

But there is also an option to save without these restrictions: pillar 3b. This is an unrestricted pension plan, which means you can save without being tied to fixed contracts or particular savings products. It doesn't, however, offer any tax benefits.